Cohen Milstein Represents Investors in Stock-Fraud Suit in Company at Nexus of Crypto and Banking
By Carol V. Gilden
Shareholder Advocate Winter 2023
In a securities fraud lawsuit straddling the volatile U.S. banking and crypto sectors, Cohen Milstein represents shareholders of Silvergate Capital Corporation, the holding company for Silvergate Bank, a federally registered depository and lender to major cryptocurrency platforms, including FTX.
On February 28, Judge Cathy Ann Bencivengo of the U.S. District Court for the Southern District of California appointed Cohen Milstein co-lead counsel in the case, In re Silvergate Capital Corporation Securities Litigation. Cohen Milstein client Wespath Funds Trust was among the institutional investors collectively appointed lead plaintiff in the same order.
Plaintiffs allege that Silvergate Bank made materially false and misleading statements and omissions about the company’s compliance framework, as well as its anti-money laundering and customer identification programs. Silvergate investors claim they incurred significant losses starting November 7, 2022, when they learned that Silvergate’s compliance practices were lax and had exposed it to potential money laundering and criminal activity.
Then, on January 5, 2023, Silvergate disclosed that the collapse of its client, FTX, had led to a run on Silvergate Bank, causing its deposits to decline by $8.1 billion, or over 68%, over the three months ending in December 2022. This led to an acute liquidity crunch, which forced Silvergate to sell off illiquid securities for a loss of over $700 million and to borrow $4.3 billion in short-term advances from Federal Home Loan Banks.
Originally filed on January 19, 2023, the complaint alleges violations of the Securities Exchange Act of 1934, U.S. Securities and Exchange Commission Rule 10b-5, and other federal statutes. The class period covers those damaged investors who acquired shares of Silvergate Capital Corporation Class A common stock between November 11, 2020 and January 5, 2023 and those who acquired shares traceable to secondary public offerings in January and December 2021.
As a federally regulated banking institution, Silvergate is subject to a wide variety of federal regulations, such as anti-terrorism and anti-money laundering regulation by the Office of Foreign Assets Control and the Financial Crimes Enforcement Network, including the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.
A critical component of Silvergate’s cryptocurrency business was its one-of-a kind service called the Silvergate Exchange Network (“SEN”). The SEN was the cryptocurrency world’s closest approximation to the SWIFT banking system, which allowed Silvergate customers to send U.S. dollars and euros between eligible counterparty SEN accounts at any time of day using the company’s application.
Throughout the Class Period, Plaintiffs allege that Silvergate repeatedly touted its “strong regulatory compliance program” as a foundation for its growth— including its anti-money laundering policies and Know Your Customer procedures.
The truth began to emerge on November 7, 2022, after the market closed, when Silvergate announced the sudden and unexplained demotion of Chief Risk Officer Tyler Pearson, who is the son-in-law of CEO Alan J. Lane. Social media commenters noted Silvergate’s exposure to FTX and Alameda Research LLC and questioned whether Pearson’s demotion indicated a lack of adequate oversight of Silvergate’s regulatory compliance. In response to this news, the price of Silvergate stock declined by $11.54 per share, or 22.6%, from a closing price of $50.96 per share on November 7, 2022, to a closing price of $39.42 per share on November 8, 2022, on unusually high trading volume.
Over the following months, additional disclosures regarding the company’s lax compliance practices reached investors, further impacting the price of Silvergate stock. Then, on January 5, 2023, the company disclosed that the collapse of FTX had led to a run on Silvergate Bank and its disastrous liquidity crunch, selloff, and borrowing spree. In response to this news, Silvergate shares plummeted $9.38, or 42.7%, in a single day on unusually high trading volume, from a closing price of $21.95 on January 4 to a closing price of $12.57 on January 5.
The bad news has continued for Silvergate as the year progresses. In February, news emerged that the U.S. Justice Department had opened a criminal fraud investigation into Silvergate over accounts it hosted for FTX and Alameda Research, both founded by Sam Bankman-Fried, who is awaiting trial on a range of federal charges. Silvergate shares again dropped on the news.
On March 1, Silvergate revealed in an SEC filing that it would not be able to file its annual report on time and was “analyzing certain regulatory and other inquiries and investigation” to determine whether it could remain viable. A week later, on March 8, the company announced that it planned to “wind down operations and voluntary liquidate the Bank.” In the statement, Silvergate said liquidation was its best course “[i]n light of recent industry and regulatory developments.”
Cohen Milstein and its co-counsel are in the process of preparing an amended complaint that will allege violations of the Securities Act and Exchange Act against the Silvergate defendants and investment bankers involved in the two secondary public offerings.